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Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia

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  • Chawwa, Tevy

Abstract

This paper presents a model to capture the impact of the Basel III’s Liquidity Coverage Ratio (LCR) and the reserves requirement regulation on the banking sector and the real economy. It employs a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model with financial frictions and calibrated to match data for Indonesia. The study shows that the impact of changing the two liquidity requirements on lending and output are relatively similar. However, lowering the LCR has consequences on the decline of demand for government bonds, so that it has a different impact on taxes, household deposits and bank’s profit. This paper also found that countercyclical liquidity regulations can improve welfare and reduce the volatility of bank loans.

Suggested Citation

  • Chawwa, Tevy, 2021. "Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 321-341.
    • Handle: RePEc:eee:ecanpo:v:71:y:2021:i:c:p:321-341
    DOI: 10.1016/j.eap.2021.05.002
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    Cited by:

    1. Advis Budiman & Solikin M. Juhro & Sugiharso Safuan, 2024. "Capital Flow and Bank Lending Channels in a Small Open Economy: Evidence from Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(2), pages 169-228, May.
    2. Ferry Syarifuddin & Toni Bakhtiar, 2022. "The Macroeconomic Effects of an Interest-Bearing CBDC: A DSGE Model," Mathematics, MDPI, vol. 10(10), pages 1-33, May.
    3. Solikin M. Juhro & Denny Lie & Atet Rizki Wijoseno & Mohammad Aly Fikry, 2022. "Fiscal Policy Stance, Central Bank Digital Currency, And The Optimal Monetary-Macroprudential Policy Mix," Working Papers WP/01/2022, Bank Indonesia.

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    More about this item

    Keywords

    Liquidity; Macroprudential policy; DSGE;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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